Prime Bank Limited a bank with a difference

3.1Foreign Exchange Foreign exchange is an important and integral part of commercial banking. It is very much Lucrative and remunerative operation for the bank, if it is conducted systematically and methodically as per norms. In order to conduct Foreign Exchange operation systematically and methodically the Foreign Exchange Regulation (FER) Act, 1947 enacted on the 11 March 1947 in the British- India provides the legal basis for regulating receipts and payments and dealings in the foreign exchange and securities. Basic regulations for conducting Foreign Exchange Operation are issued by the Government as well as by the Bangladesh Bank in the form of Public notice, circulars, SROs etc. From time to time Authorized Dealers (Ads) in Foreign Exchange should meticulously follow the said circulars and guidelines of Bangladesh Bank. Meaning of Foreign Exchange Foreign Exchange means exchange of foreign currency between two countries. If the "Foreign Exchange" is considered as a subject, it means all kinds of transaction related to foreign currency. In other words, foreign exchange deals with foreign financial transactions. 3.2 Necessity of Foreign Exchange No country self-sufficient in this world. Every one is, more or less dependent on other, for goods or services. Say, Bangladesh has cheap manpower whereas Saudi Arabia has cheap petroleum. So, Bangladesh is dependent on Saudi Arabia for petroleum and Saudi Arabia is dependent on Bangladesh for cheap manpower. People of one country are going to abroad for medical service, education etc. thus there is an exchange of foreign currency. 3.3 Activities of Foreign Exchange Division

Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

Activities of Foreign Exchange Division can be broadly divided into three parts • • • Export Import Remittance

Activities of Foreign Exchange Division

Export

Import

Remittance

Fig: Activities of Foreign Exchange Division 3.4 Regulation for Foreign Exchange Division Foreign Exchange transactions are being controlled by the following rules and regulations. 3.4.1 Local regulation • • Foreign Exchange act 1047. Bangladesh bank issues Foreign Exchange Circular from time to time to control the export, import and remittance operation. • Ministries of commerce issues export and import policies giving basic formalities for import and export. • Sometimes CCI issues public notices for any kind of change in Foreign Exchange transaction.

Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

Bangladesh bank publishes two volumes in 1996. These comprise the complete instructions to be followed by the authorized dealers in transactions related to Foreign Exchange.

3.4.2 International Regulation Foreign Exchange There are some international organizations influencing our Foreign Exchange transactions. This areInternational chambers of Commerce (ICC) is a world wide nongovernmental organization of the thousand of companies. It was founded in 1919. ICC has been issued some publication like UCPDC, URC and URR etc, which are being followed by all the member countries. There is also International Court of Arbitration to solve the international business disputes. World Trade Organization (WTO) is another international trade organization established in 1995. General agreement on Tariff and Trade (GATT) was established in 1948, after completion 8th round the organization has been abolished and replaced by WTO. This organization has role in international trade, through its 124 member countries. 3.5 Parties involved in Documentary Credit The issuing Bank: The bank, that issues documentary credit on account of its client. The Advising Bank: This is the bank acting as agent of the issuing bank, to advise L\C to the exporter or beneficiary.

Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

Reimbursing Bank: This is the bank acting as agent of the issuing bank, authorized to make payment or to honor reimbursing claim of the negotiating bank. Negotiating Bank: This bank provides value to the beneficiary against presentation of documents complying credits terms. Usually this is exporter’s bank that purchases the export documents. The importer or buyer is the applicant of a Letter of Credit. Applicant must be the client of the issuing bank. The Beneficiary/Exporter/Seller: The exporter or seller of the goods is the beneficiary of a Letter of Credit. Notify Party: The Party/ Bank to whom the arrival of shipment has to be notified or to be informed called Notify Party. 3.6 Letter of Credit Letter of Credit (L/C) is a credit contract whereby the buyer's bank is committed (on behalf of the buyer) to place an agreed amount of money at the seller's disposal under some agreed conditions. Since the agreed conditions include amongst other things, the presentations of some specified documents, the letter of credit is called Documentary letter of Credit. The Uniform and practices for Documentary credit published by International Chamber of Commerce (1993) Revision, publication no 500 defines Documentary Credit: Any arrangement, however named or described, where by a bank (the issuing bank) acting at the request and on the instructions of a customer (the applicant) or its own behalf.

Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

1. Is to make a payment to or to the order of a third party (the beneficiary) or is to accept and pay bills of exchange drawn by the beneficiary. 2. Authorizes another bank to effect such payment. 3. Authorizes another bank to negotiate against stipulated documents provided that the terms and conditions are compiled with. 3.7 Types of L/C: Letter of Credit basically divided into two types • Revocable L\C Revocable L\C is a credit which can be amended/ cancelled by issuing bank, without prior notice to the seller. • Irrevocable L/C Irrevocable L/C is a credit, which cannot be amended or cancelled with out the agreement of all parties.
Letter of Credit

Revocable

Irrevocable

Fig: Two basic type of Letter of Credit. Some other types of L\C s are: 1. Confirmed L\C. 2. Transferable L\C. 3. Confirmed L\C. 4. Revolving L\C. 5. Restricted L\C.
Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

6. Red Clause L\C. 7. Green Clause L\C. 8. Back-to-Back L\C. 3.8 Letter of Credit-Settlement Settlement means fulfilling the commitment of issuing bank in regard to effecting payment subject to satisfying the credit terms. Settlement may be done under 3 (Three) separate arrangements as stipulated in the Credit. 3.8.1 Settlement by Payment Here the seller presents the documents to the nominated bank and bank scrutiny the documents. If satisfies, the nominated bank makes payments to the beneficiary and incase this bank is other than the issuing bank, then sends the documents to issuing bank and claim reimbursement as per arrangement. 3.8.2 Settlement by Acceptance Under this arrangement the seller submits the documents evidencing the shipment to the accepting bank (nominated by the issuing bank for acceptance) accompanied by a draft and bank at the specified tenor. After being satisfied with the documents, the bank accepts the documents and the drafts and if it is a bank other than issuing bank, then se4nds the documents to the issuing bank stating that it has accepted the draft and at maturity the reimbursement will be obtained in the pre- agreed manner.

3.8.3 Settlement by Negotiation

Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

This settlement proceeds with the submission of the documents by the seller to negotiating bank. In a freely negotiable credit any bank can negotiate documents and if negotiation restricted by the issuing bank, only nominated bank can negotiate the documents. After scrutinizing that the documents meet the credit requirements, the bank can negotiate the documents and give the value to beneficiary. The negotiation bank then sends the documents to the issuing bank. As, usual the reimburse4mentwill be obtained in the preagreed manner. 3.9 Modes of investment used in Foreign Exchange Business In Prime Bank Ltd., most widely used modes of investment in foreign exchange business are following 3.9.1 Payment Against Document (PAD)

The major import done by Prime Bank Ltd is under Payment Against Document (PAD) mode. It is also popularly known as Accepted Bill for Payment (ABP). Under this mode the bank import goods at the request of the clients and sales the same to the clients at the cost plus declared profit. The prices of the good will have to be known to both the bank and the client and the profit must be declared before sale to client. 3.9.2 Loan Against Trust Receipt (LTR)

Bank also imports goods under Loan against Trust Receipt (LTR). In this method goods will be under the custody of the client. So, necessary collaterals are taken from the client. Minimum 10% security margin is needed in this mode.

3.10 Operational Mechanism of Letter of Credit (L/C)
Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

Buyer/ Importer

Indenter Sale/Purchase Contract 4. Submission of Documents

Seller/ Exporter

1. Written Application to Issue L/C 3. Advices & or confirms L/C 2. Issue L/C

Effects Payment by

Issuing Bank

6. Forward Document 7. Effect Payment Pay

Advising/Confirming /Negotiating Bank

Paying/ Reimbursing Bank Instruct to Pay or Reimburse 3.10.1 Steps involved in lodgment

or Reimburse

When the scrutiny of import bill over the steps should be taken for lodgment 1. At first all the particular of the documents are entered in the PAD (Payment against Document) register and PAD no. seal is given on all the copies of the received documents. 2. Converting the foreign currency into Bangladeshi currency. 3. Reserving the contingent liability register. 4. Preparing lodgment voucher. 5. Preparing other vouchers. 6. Sending IBCA to the Head Office. 7. Making intimation to the importer. 3.10.2 Accounting Effect
Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

For reversing contingent liability contra voucher is debited by the Banker’s Liability A/C and credited with Customer Liability A/C. For, PAD, income on exchange there is few credit vouchers. In the debit voucher the debit head is PAD and Income and Head Office A/C is credited. In the credit vouchers the opposite of these entries is made. Now the respective thinks that the application is fit to open L/C, the following accounting treatments are given: Accounting Treatment Clients A/C Margin on L/C Commission on L/C VAT (15% of commission) on L/C F.C.C (Foreign Currency Clearing) Registration Fee Telex/ Postage Charge Miscellaneous Charges A/C (For EXP Form) Credit Credit Credit Credit Debit Credit Credit Credit

After that L/C number and the above entries are given in the L/C register. The contra entries stating the liability of the bank and the client are as follows. Accounting Treatment: Customer’s Liability Banker’s Liability Debit Credit

When the transmission of the L/C is done through the tested telex or fax to advise the L/C to the beneficiary. If the amount of the L/C exceeds US $10,000.00 Prime Bank takes the credit report of the beneficiary (CIB report) to ensure worthiness of the supplying goods.

3.10.3 Retirement of the Shipping Document
Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

The importer receives the intimation and gives necessary instruction to bank fro retirement of the disposal of the shipping document to clear imported bills or for the disposal of the shipping document to clear the imported goods from the Custom Authority. Following steps are taken for retirement of the document. Steps involved in Retirement1. Calculation of the Interest (if any). 2. Calculation of the other charges. 3. Passing vouchers. 4. Entry in the register. 5. Endorsement in the Bill of Lading or other Transport Document and in the Bill of Exchange. 3.10.4 Accounting Effect On scrutiny, if it ids found that the document drawn in conformity with the terms of the credit i.e. the document are in order, Prime Bank lodges the document in PAD and following vouchers are passed. Accounting Treatment L/C Margin A/C PAD A/C (Margin amount transferred to PAD A/C) Customer A/C PAD A/C Debit Credit Debit Credit

(Customer’s A/C debited for the remaining amount) PAD A/C Prime Bank A/C Exchange Gain Reversal Entries
Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

Debit Credit Credit

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Prime Bank Limited a bank with a difference

Banker’s liability Customer liability (When lodgment is given)

Debit Credit

After realizing the telex charge, service charge, profit (if any), the shipping document is then stamped with the PAD number and entered in PAD register. Intimation is given to the customer calling on the banker’s counter requesting retirement of the shipping documents. After passing the necessary vouchers, endorsement is made in the back of the Bill of Exchange as “Received Payment” and the Bill of Lading of endorsed to the effect “Please deliver to the order of M/S……………………….” under two authorize signature of the bank officials (PA holder). Then the documents are delivered to the importer. 3.10.5 Payment Procedure of the Import Document This is the sensitive task of Import department. The officials have to be very much careful while making the payment. This task constitute of following• Date of Payment Usually payment is made within the seven days after the documents have been received. If the payment is become deferred, the negotiating bank may claim interest for making delay. • • Preparing Sales Memo Requisition for the Foreign Currency A sales memo made at B.C rate to the customer. As T.T and O.D rate is paid to the I.D. For arranging necessary fund for payment, a requisition is sent to International department. • Transmission of the Telex A Telex is transmitted to the correspondent Bank ensuring that the payment is being made.

3.11 Back to Back L/C

Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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Prime Bank Limited a bank with a difference

Back to Back L/C may be defined as a credit which is opened at the instruction and request of the beneficiary of the Original Export L/C on the basis of the strength that L/C, Ready made Garments Industries and specialized Textiles Industries are allowed the facility of importing fabrics and other materials needed for manufacture of garments/ specialized Textiles against Back to Back l/C arrangement. Back to Back L/Cs are two typesi. ii. Foreign Back to Back L/C Inland Back to Back L/C

A Back to Back L/C is opened against an Irrevocable L/C having reasonable date of validity to cover shipment of merchandise after completion of the manufacturing process. The export L/C is lien marked with the Back to Back L/C issuing Bank. Import L/C is opened on the issuance basis covering since of not more than 180 days. The import L/C is opened for 78%-80% of the value of export L/C, the payment is made normally from the proceeds of the export bill negotiated after shipment. 3.11.1 Procedure of Opening Back to Back L/C The following papers or documents are needed to submit by the exporter to the Bank for opening a Foreign Back to Back L/C-LCA (Letter of Credit Authorization Form) duly filled and signed. -Indent or Proforma Invoice. -Import Form Along the above papers/ documents, Original Export L/C is to be submitted by the exporter. On the receipts of these documents the Bank scrutinizes the terms and conditions of the Export L/C. After getting the approval of the Head Office through Credit Section, the particulars of the L/Cs are entered L/C opening register.

Foreign Exchange Mechanism: a comprehensive Study of Prime bank Ltd. (considering Jubil ee Road Branch, Chittagong as standard)

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